Producer price inflation continuing to drop

Despite the expectations for producer price rises at the beginning of this year, the producer price inflation in manufacturing continued to drop in March, reaching 1.5% y-o-y. A similar situation when the rise in inflation expectations did not translate into an actual rise in inflation was observed at the beginning of last year as well. In all likelihood, it was a repeat of the scenario where, upon feeling customers' resistance to an upward adjustment in the price-list, entrepreneurs have to contain their appetites for the time being (See Fig. 1).

TThe prices of exported manufacturing production hardly changed (a rise of 0.3% y-o-y). To a great extent, that was the result of the stagnating wood prices. Moreover, even though the beginning of 2012 was favourable to metal exports in terms of prices, the March performance counterbalanced that. In recent years, the prices of exported production overall rose at a slightly lower rate than those of the production sold locally, but the situation in different by branches. For instance, while consumer's purchasing power limited price increase for food sold in a domestic market in recent years (the prices of food products are currently at about the mid-2008 level), whereas the price-lists of exported foodstuffs keep achieving new records (See Figure 2).

Figure 2. Food product manufacturer price index (2005 = 100)

Source: Central Statistical Bureau data

Albeit the prices of oil have dropped compared to mid-March, their level remains high and will continue to be reflected in producer prices for some time. Thus, in the first quarter of this year, terms of trade may continue to deteriorate, i.e., import unit value could still rise at a faster rate than export unit value. Last year overall, the trade conditions were favourable to Latvia. Since 2005, the export unit value index surpassed import unit value index by almost 10 percentage points. (See Fig. 3).